Q2 2022 Avalonbay Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Avalonbay communities second quarter 2022 earnings Conference call.
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Host for today's conference call is Mr. Jason Wright, Vice President of Investor Relations. Mr. Riley you May begin your conference.
Thank you Kyle and welcome to Avalonbay communities second quarter 2022 earnings Conference call before we begin. Please note that forward looking statements may be made during this discussion there are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially.
A discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K, and Form 10-Q filed with the SEC.
Usual. This press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www Dot Avalon Bay Dot Com poured flash earnings.
Encourage you to refer to this information during the review of our operating results and financial performance and with that I will turn the call over to <unk> CEO and president of Avalonbay communities for his remarks.
Yes.
Thank you, Jason and thanks to everyone for joining us today, Kevin and Shawn and I will share some prepared remarks, and Matt is with us as well for Q&A.
I'll start by discussing our financial and operating performance as well as our latest approaches to capital allocation.
On operations, we had a very strong second quarter with core <unk> of $2 43 per share exceeding our prior guidance by <unk> 12 per share or more than 5% above expectations.
This magnitude of outperformance is atypical, particularly since we increased Q2 guidance at the end of April and it was driven by continued asking rent growth above average occupancy and favorable net bad debt.
As shown on slide four core <unk> increased roughly 23% during the second quarter, bringing our year to date <unk> growth up to 19%.
And as Kevin will describe more fully we're raising core <unk> guidance for the year to $9 86 per share at the midpoint, an increase of 28 cents per share over our prior guidance.
As we will highlight later during our remarks, there are a number of meaningful tailwind that support our strong earnings guidance for the back half of the year and support continued growth going into next year or if the macro environment were to erode in a way, which impacts our operating fundamentals that should serve as a ballast.
Switching over to capital allocation, our balance sheet is as strong as it has ever been providing strength in an uncertain macro environment, allowing us to maintain our focus on creating shareholder value over time and across cycles.
We've also responded to the changing capital markets in certain ways, we issued a $500 million equity forward in April at $2 50 to $250 a share, which we can draw down through the end of 2023 to fund our future growth.
As we communicated in Q1, we also shifted from being a net buyer to a net neutral trader of assets in 2022, as we continue to optimize the portfolio and rotate capital from our established regions into our expansion markets.
We continue to selectively match dispositions with acquisitions at market cap rates, which we've seen widened by approximately 50 basis points in many markets.
Consistent with prior activity, our dispositions are generally of older assets with higher Capex profiles, and our established regions, which were utilizing to fund acquisitions of newer assets in our expansion markets.
And while we remain active on the development front with $2 $1 billion under construction and a $4 7 billion dollar development rights pipeline, we have reduced our projected 2022 starts based on some project specific delays.
For new potential projects, we are focused on maintaining flexibility. So that we can ramp up or down our overall 2023 development start volume depending on how macro conditions evolve.
Before turning it to Sean let me quickly provide some additional color on our Q2 revenue growth.
Slide five provides a breakout of our 12, 9% Q2 same store revenue growth with the vast majority coming from growth in lease rates as well as the reduced impact of concessions as compared to Q2 last year.
Net bad debt also improved relative to last year with additional rent relief payments offsetting the change in underlying bad debt.
Turning to slide six net bad debt was a meaningful component of our outperformance relative to Q2 guidance with rent relief payments via the federal government's emergency rental assistant programs continuing into May and June as compared to our prior expectations that these government funds were dry would run dry earlier in Q2.
And while net bad debt remains elevated we are pleased to see improving resident payment behavior with underlying bad debt currently in the low 3% of revenue range down from mid 4% in Q4 2021 compared to 50 to 70 basis points historically.
And with that I'll turn it to Shawn to review the operating backdrop in more detail.
Alright, Thanks, Ben turning to slide seven.
Revenue growth been noted was supported by very healthy trends in the business throughout the quarter.
Turnover remained below historical norms, even though it ticked up in absolute terms and Jim given normal seasonal patterns and occupancy was above 96% each month of the quarter.
Additionally, like term effective rent change trended up during the quarter and average roughly 14% supported by healthy demand across all of our regions.
Lastly, we started to see some improvement in uncollectible lease revenue excluding rent relief during the second quarter as residents who are chronically delinquent started moving out from communities, particularly in some of our more challenged markets like L. A and New York.
Well, we expect the number of delinquent accounts to continue to decline in the back half of 2022.
Eight of improvement will likely be modest from month to month.
Moving to slide eight the outlook for the business remains quite positive asking rents continue to increase throughout the second quarter and are up more than 9% since the first of the year supporting loss to lease of roughly 15% at quarter end.
And with the continued trend of historically low availability and resident incomes growing in the double digit percentage range for well positioned to capture higher rent levels as we move further into the second half of 2022.
And look ahead to 2023.
Turning to slide nine our lease up portfolio continues to post very strong results leasing velocity exceeded 30 leases per month during the quarter at rents that were on average about $350 were 12% above initial projections.
As a result of stabilized yields are projected to be in the mid 6% range on almost 700 million in business for us.
We're seeing significant value creation relative to underlying cap rates.
Now I'll turn it to Kevin to address our updated outlook for 2022 and the balance sheet. Kevin. Thanks, Sean on Slide 10, we provide a revised financial outlook for 2022, we now expect full year core episodes per share 986, or 19, 4% increase over last year's earnings.
This would represent the company's strongest growth in full year earnings in over two decades.
This also represents an increase of 28 relative to our expectations in April reflecting continued strong revenue growth across our business.
Drilling down a bit further there's 28 increase represents 31 cents and higher same store our residential revenue.
We offset by a <unk> <unk> decrease in other categories as described on page five of our earnings release.
This 31 increase in same store residential revenue was in turn driven primarily by higher than expected growth in lease rates and by lower than expected bad debt with ninth sense of the increase having already been recognized in the second quarter and the remaining 22 cents divided roughly evenly over the third and fourth quarters.
As it relates to bad debt and rent relief, we expect underlying bad debt before the impact of rent relief to the client from three 9% in the first half of the year to about two 7% in the second half. We also expect rent release, a decline from the $28 million, we recognized in the first half of the year to $7 million in the second.
Nearly all of which is expected in the third quarter.
As a result, we expect net bad debt will increase from 135 basis points in the first half of the year to 215 basis points in the second half for a full year rate of about 180 basis points.
Keep in mind that net bad debt for 2021 was 210 basis points. So the change in bad debt on a full year basis is projected to contribute roughly 30 basis points to revenue growth in 2022.
Thus for overall same store portfolio at the mid point of our ever got revised guidance. We now project same store residential revenue year over year growth of 11.25% same store residential operating expense growth of 5% and same store of residential NOI growth was 14.25%.
Finally, we expect to start about $850 million of new developments in 2022 down slightly from the $1.15 billion expected in our initial outlook as starts for a few planned developments has shifted into early 2023.
Turning to slide 11.
Nearly 90% of current development underway is already match funded with long term debt and equity capital.
Walking in the cost of this investment capital helps ensure that these projects will provide earnings in any of the growth when they are completed and stabilized.
Turning to slide 12, as we look ahead, our balance sheet remains exceptionally well positioned to provide financial strength and stability, while also giving us the flexibility to continue funding attractive growth opportunities across our investment platforms.
In this regard we enjoy low leverage with net debt to EBITDA was four nine times, which is below our target range of five times to six times, our interest coverage ratio and unencumbered NOI percentage are at record levels of seven times in 95% respectively.
Debt maturities are well lettered with a weighted average years to maturity of about eight and a half years.
And as shown on slide 13, our liquidity position is excellent with $1 $3 billion in excess liquidity relative to our remaining unfunded commitments of about $400 million as of quarter end with that I'll turn it back to Ben.
Thanks, Kevin.
As we look forward, we wanted to emphasize a number of additional tailwind as described on slide 14 that support continued value creation and our strong earnings outlook.
To start and focusing in on development Slide 15 highlights the historical spread between our development yields and stabilized cap rates of core measure of how we generate meaningful value for shareholders through our industry leading development platform.
With our strong balance sheet and match funding approach.
We were able to ratchet down or ratchet up our start activity at particular points in time, but do so in a way that provides consistent incremental value creation and earnings growth.
On completions, so far this year projects at yesterday's cost in todays rents, we have realized any exceptionally strong spread between stabilized yields and current cap rates of over 200 basis points generating significant value creation and earnings growth.
For projects in our development rights pipeline, we're seeing this spread range from 100 to 200 basis points based on our most current underwriting, which we believe continues to provide appropriate risk adjusted returns.
In the near term as shown on slide 16, our developments underway are expected to provide meaningful incremental earnings with roughly $125 million of incremental NOI to come from these projects over the next two to three years.
Moving to slide 17, and as we previously outlined we are in the midst of transforming our operating platform with significant investments in innovation and technology that we expect to generate 200 basis points of margin improvement are $40 million to $50 million of NOI.
Slide 17 provides incremental disclosure on certain of these initiatives, including the projected progress year by year with $20 million of additional revenue associated with the rollout of bulk Internet managed Wi Fi and smart home technology, and an additional $20 million in expense savings to come from the Digitization of a number of customer experiences.
Leading self touring maintenance renewals and others.
We also introduced our structured investment program last quarter, which is off to a solid start.
On slide 18, we've closed our first two investments providing preferred equity to third party developers on new construction projects.
By leveraging our intimate knowledge of development construction and operations. We believe that we can achieve attractive risk adjusted returns on $300 million to $500 million of capital. Our book of business, we will build up over time and providing incremental earnings growth.
Before closing I also want to highlight as shown on slide 19, our continued ESG leadership given the recent publication of our 11th annual corporate responsibility report.
On the E. We are one of the first reads to set numeric science based targets for emission reductions and we're proud that we've achieved actual reductions through these initiatives, 30% reductions in scope, one and scope two emissions and 20% reductions in scope three emissions so far.
On the S. Our investments in our people and culture, including advancing our inclusion and diversity initiatives remain a priority with progress being made and more to come.
We also continue to invest in our local communities through volunteer time and direct donations are key part of how Avalon Bay associates connect around our evergreen culture, including our spirit of caring.
In closing on slide 20, with a summary of our key takeaways.
Pleased with our operating results to date have meaningfully lifted our earnings expectations for the year.
I believe that there are a number of tailwind specific to Avalon Bay that set the table for strong continued growth looking ahead.
I'll turn it to the operator to facilitate questions.
Thank you once again, ladies and gentlemen, Daddy Star one to ask a question I wanted to ask a question we take a real quick question from Nicholas Joseph with CBD.
Your line is open. Please go ahead.
Thank you.
Starting on the transaction market and I'm looking on slide 15 here, obviously, there's a pretty widespread between the development initial yields in the transaction market and it looks like recognize these are annual numbers.
Cap rates have come down in 2022, so just curious what you've seen over the last three or six months in terms of movement in cap rates and the asset values across your markets.
Yeah, Hey, Nick it's Matt.
Yeah, certainly in the last couple of months Theres been a shift in the transaction market with the rise in rates and so you.
You know we are pretty active in the market that we've had together.
Good Oh it is.
Changing quickly so the first thing I'd say is.
Nobody can be reassure, but the data that we points that we've gotten recently would suggest as Ben had mentioned in his prepared remarks, you know cap rates are probably up call. It 50 basis points, maybe a little more in some regions a little less than others.
And depending on the asset type, they're definitely deals, which are just not transacting, where they may have seen a more significant move, particularly if they were.
Targeted more to a highly levered buyers.
But most of the assets that would be in our portfolio are more kind of institutional grade type assets.
Probably been more in that in that range annualized continue to grow. So you know in terms of overall asset values.
Now maybe down 5% to 10% you know.
Because you're getting some lift in the numerator that offset some of the increase in the denominator.
Thanks, That's helpful. And then just as you start to execute on some of these.
<unk> investment program deals.
First few deals come without you know what what sort of competition are you seeing.
No I'll, just kind of any color on at least the entrance into this market.
Yeah, Hey, Nick it's Matt I guess, all I can speak to that one as well so the first two deals we have.
One is actually in the East Bay.
The San Francisco area and the other one is in Denver.
And then we have a couple of others working their way through the pipeline actually on the East coast. So we're seeing a nice geographic mix I mean, it's typically local merchant builder developer sponsors and we do think the deal flow. There is a lot of leverage there given our deep presence in our in our markets.
Some of these are sites that we knew from you know kind of looking at them as land.
Some of them. They certainly you know theres good deal flow from the brokerage.
Community and folks were talking to about asset acquisitions or asset dispositions and the other thing. We're seeing is pretty strong relationship alignment with first lenders. All these deals have obviously first construction lenders and they really take heart.
Heart in the fact that we're in there with them and you have such an experienced capital provider further up in the capital stack then they are given our expertise in development and construction and operations.
We're looking to get repeat business.
From a pool of lenders and I think the deal flow is probably increasing as capital gets a little harder to find so we like our position going forward.
That we should be even more competitive.
Thank you.
Thank you we take our next question from Austin <unk> with key.
Keybanc capital markets. Your line is open.
Great. Thank you. So I was wondering if you guys could provide where you expect your 23 are in into shape up at this point.
And I'm just curious given that we're starting at presumably a historically high earn in entering the year you still got the sizable loss to lease in place today, I guess im trying understand if conditions do soften materially from here I mean, what's the probability that you'd actually see revenue growth.
<unk> turned negative.
Again, if things soften materially and I recognize all recessions are different but just using kind of historical data maybe is a little bit of a.
You know a little bit of.
To give some idea of what that downside risk could be.
Yeah. Austin This is Sean I'll take that one as it relates to the earn in.
Still obviously a lot of leasing to do a lot of transactions to execute between now and year end.
The guidance I'd give you is coming into 2022.
Earn and that we had in place at the beginning of the year was about two 5%.
And so as you look forward to 2023, given the leases that we've executed thus far this year, what you could sort of expect based on the guidance. We provided for the second half of the year.
The earn in going into 2023 would be well above where we started 2022.
So keep in mind that you know obviously is one variable in the whole puzzle.
There are some other factors that could be a headwind or tailwind.
Including obviously, the normalization of bad debt.
In terms of underlying collection rates should be a bit of a tailwind.
Loss of rent relief from this year will be a bit of a headwind. So you've got to kind of keep all those things in mind as it relates to how the embedded growth kind of translates to total revenue growth when we get to next year.
And then in terms of your other question about kind of our loss to leases and what might have to happen. Yeah. I think you can make a fair point that.
Even if the macro environment continues to sour there's still a lot of room between where rents are today at where rents would need to go to particularly given how our leases expire throughout the year to end up in a position where you could have negative revenue growth. It really would have to be I think I would probably characterize it as a pretty severe.
I'm shocked.
I really see that happen that quickly in terms of the whipsaw.
With a lot of cushion kind of between Dallas and any kind of negative revenue growth. So that's how I would describe that.
Okay. That's helpful. And then just secondly, you guys had talked about at NAREIT 2023 starts in the one $3 billion to $1.8 billion range depending.
Depending on the environment, obviously, some deals got pushed into next year. So is that upside to the 1318. So could you provide an update there and then just also.
Curious how youre thinking about the additional capacity that you have today given leverages below the low end of your range.
Yeah sure I'll speak to that this is Matt I can speak to the development volume and then maybe Kevin wants to talk to the debt part of the question.
Yes, I mean, so our development starts this year are going to be less than what we had thought going into the year and thats really just based on some deal specific factors.
Yes, all else equal that activity would roll into 'twenty three.
And so.
And obviously, our development rights pipeline ticked up this quarter to $4 7 billion, which is I think is largest it's ever been so.
What I would say is if the deals continue the economics on those deals continue to look attractive.
We certainly could start.
You know anywhere from 1 billion to $2 billion next year, depending on.
How those deals come together when we get final costs in we're really focused on preserving flexibility based on if we do see changes there, but we certainly have that possibility and of course, we have the equity forward. So we have a fair amount of that capital already raised so to speak.
Kevin you want to speak to the yeah sure Yeah. Thanks, Matt asked I mean, I think your point's a good one.
I mean, the first point I'd make is we enter.
The environment, we're in we're expecting to enter 2023 from a position of terrific strength from a balance sheet point of view leverage as you pointed out is below our target range of five to six times in a normal market environment. The combination of free cash flow, which is typically around $300 million a year and is around now.
And <unk>.
Selling assets for butane of capital, which is usually between four and $700 million and then on normal levels of EBIT growth leveraged EBITDA growth kind of ads.
There are three to four or $500 million on top of that so you end up with kind of having around a $1 billion a quarter or more give or take in leverage neutral funding capacity for investment primarily development.
In a typical year and with a tremendous amount of NOI and EBITDA growth that we're experiencing right now you can you.
Youre correct to point out that we would have even more capacity beyond that call of $1 billion of core quarter of $1 billion of leveraged neutral with plenty of capacity in 2023, just by flexing up in terms of debt issuance. Obviously at current rates today don't look attractive relative to where they were a year or so ago.
Currently if we would need a tenured debt it would be in the low 4% range, given where the treasuries are right now.
That is sort of reasonably attractive if you look back over the last 10 years, but most of it.
But if you look back over the.
As we say over the last 20 years, if you look back over the last 10 years for fourth.
Fourth quarter percent unsecured debt costs for us would be relatively high.
But it is reasonably attractive compared to development and development uses so I think as we look into 2023 and put together our capital plan. We've got lots of choices between free cash flow ability to sell assets. The equity for that that are match has pointed out and our ability to leverage up but I think how much debt. We take on we will at that time be a little bit of a function of how attractive.
That costs are real.
Relative to both diverse development yields as well as what our sense is as to the cost and other choices in terms of the other capital markets.
Austin This is Dan I'll add I'll add a couple of comments.
Paul to your question Sean on operating fundamentals and then also how were looking forward next year in terms of development starts in but I'd emphasize around our strength is also our portfolio positioning and particularly our orientation to the suburbs right with two thirds of our our portfolio and the suburban markets. We believe.
That's going to provide a level of durability that may not be seen in on other markets demand drivers you know our expectation is going to continue to be relatively strong there and then supply.
Yeah relative to national averages has definitely allowed was projected to be in the range of one 5% of stock. So on the operating side, we think that provides us with some additional resiliency and durability going into next year and then from a development perspective as you've seen from us over the really over the last couple of years, the bulk of our new development activity will continue to be in the suburban.
<unk>.
That's very helpful. Thanks for the time everyone.
Thank you we move to the next question from Steve <unk>.
Evercore.
Evercore.
Your line is open.
Great. Thanks, good afternoon.
Sean I was wondering if you could just provide a little color on where you're sending out renewal notices for.
I guess, what you got in July maybe August September and kind of what your thoughts are for the balance of the year.
Sure Steve happy to address that.
In July .
Yes, we were basically in the low double digit range in terms of where the offers went out.
And that remains relatively constant as we look forward over the next 60 to 90 days kind of in that low double digit range.
And keep in mind that.
As it relates to renewals, we are slightly more constrained than normal given some of the covered overlay regulations that remain in place and in markets like California as an example.
So there is just more to come on renewals, but it's probably going to be in the next year before we're able to get get all of it is the way I'd probably describe that to you Steve.
Okay, and maybe just circling back to I guess, the page 15, you've gotten a couple of questions on the development I'm just curious as you.
Sort of look at the major input costs, whether it's lumber in certain areas or steel concrete I'm. Just what are you seeing on the inflation front, they are and and I realize that you guys.
I guess the current developments are the beneficiaries of higher rents with with costs from a year or two ago.
But the environment today to start in 'twenty three is a little different so you know how much of yields come in on kind of the future pipeline and.
I guess, how are you thinking about cost moving into next year.
Yeah sure Steve This is Matt as it relates to cost inflation is still out there is still significant.
It feels like we're at the top and then it may be starting to downshift.
For sure obviously lumber pricing lumber prices are down.
Our sales start to seem like Theyre coming off pretty quickly now so.
I guess I'd say I'm guardedly.
Guardedly optimistic that.
<unk> will start to become a little more favorable I don't think that means hard costs are necessarily going to drop but the days of 1% per month increases may be behind us.
Maybe not in all markets, but definitely in some markets.
As it relates to how that affects the economics of our development book, our development rights pipeline today on today's rents and today's hard cost is running into kind of a typical mid fives yield and if you look at the developments that we're starting this year, that's probably around where they are as well the three or four we started so far the two years.
Three we expect to start in the second half here.
Compared to two years ago that was probably high five so it is probably down.
30, 40 basis points.
But that still provides a pretty strong spread and I do think that those cap rates are probably representative of where they are today.
Now frankly.
Development that we completed late last year, the cap rates were probably sub four.
We're always a little conservative in how we quote these things so I would say forecast probably probably a good representation for our best guess as to where those deals would trade today, if they were stabilized and in the market.
And Steve from a sensitivity standpoint, we emphasize this last quarter, but just to reiterate it again as you think about hard costs increases rent increases and NOI increases roughly if you are keeping pace with 10% construction costs increases in hard costs being 60% of our overall project cost you mean approximately.
6% NOI uplift and so if you get both of those and those levels are you able to maintain yields at that 5% type of range that Matt referenced.
Great. Thanks, that's it for me.
Thank you we take over next question from <unk> <unk> with Goldman Sachs.
Hi, Thank you for taking my question.
Could you guys talk about what you're seeing in your set up more tech oriented markets. This is there have been any.
<unk>.
The broader malaise that DSD in Guernsey that reflect in the.
Business.
Needs around that thank you.
Yes, Sean this is Sean.
At this point the answer is no.
We're kind of reading in the media. The same things you are in terms of particularly some of the startups trying to lean things out some of the larger companies slowing the pace of hiring.
But based on the demand that we're experiencing coming in the front door. It is not impacting the.
The renter population in terms of their desire for the types of apartments that we offer.
Understood and then my.
Follow up question, Andy then jiffy recession, how would you view the relative positioning of development versus acquisitions.
All into a tougher economic backdrop.
John I'll start this is Ben.
The our acquisition activity.
We used to date and this is the expectation.
Going forward it could adjust if the market got further dislocated, but it's an approach really based on trading of assets right and the movement from selling of assets in our established regions and then reallocating that capital into our established regions and it ties very much into the portfolio optimization initiatives that we've been.
Focused on as well as our diversification initiatives.
So that's the primary element on the development side we.
We think about capital allocation there at a high level, it's really a triangulation, where we're thinking about what's the opportunity set right, Matt talked about sort of the spreads that we need to maintain so how do we think about that sufficient spread that is there and probably in the at the bottom end and that 100 150 basis point.
Type of range to appropriately.
Provide the return on that risk and then we're thinking about the whats the other component of it is how do you think about the relative attractiveness of that development and the other relative sources. There. So we're triangulating those two dynamics along with our source of capital.
That will really continue to that's been our approach and that will continue to be our approach as we think about our capital allocation choices I'm going forward.
Are there any lessons to take from the last financial crisis, as we think about the relative positioning of those two areas of capital allocation.
Okay.
In terms of acquisitions versus development, yes.
Well I mean, I think probably there are lessons, we probably would have taken us first of all always have a prepare our balance sheet. So you are positioned to be able to respond to the opportunities that emerge in the market. So in a normal operating environment.
We typically enjoy developing and thats, our highest and best source of shareholder value creation.
But obviously in a dislocated market environment can see acquisition opportunities emerge in certain circumstances as you saw us engage in in 2020. There are opportunities there are pretty attractive from a standpoint of buying back our stock so.
That's part of the reason why you'll see John is we're operating at below our target level of leverage and with quite a bit of excess liquidity available to us.
Because you know when there is more of a greater dispersion.
The macroeconomic environment that can unfold in front of you want to be prepared to be able to respond positively to our to the large majority of them and so we're in a position to to hunker down if we need to but.
More likely we are in a position to really act and use our capital strength in order to invest in whatever the opportunities that may emerge over the next year or so.
Certainly one thing just one thing just to add to that to keep in mind on the development book and this is not just a reflection of our <unk> following the GSE, but prior downturns as it relates to development.
Those typically are some very good times for us as it relates to new land deals either renegotiating deals that we have sourcing new land and importantly, you know is there if there is a reset and construction costs as Matt pointed out that is a very good time to buy out jobs.
We buy it out one you want once you only build it once you release that every year, so that tends to be a very good time for us to source opportunities and get them started and then they will mature and deliver.
They tend to be very very nice yields on that book of business. So that is one thing that is relevant to the development side of the equation.
Thank you for the insight.
Thank you we take over next question from Brent <unk>.
RBC capital markets.
Hey, everyone.
The delayed start so is there anything in common with those.
Is there something thats specific to each of them individually and I guess, what's the likelihood that we will see further delays next quarter from projects that are further out et cetera.
Yeah, Hey, Brad its Matt.
No I wouldn't say I mean, the thing Thats in common is just what we're seeing across our.
Everywhere really which is just.
<unk> backed up.
Honestly, even the design professionals backed up a little bit in terms of getting final permit drawing then and so on so.
I think that's a general trend, we're seeing across the space.
<unk> and <unk>.
Probably is likely to continue I think that we have started to factor that in as we think about.
You know kind of start activity and as we think about pre development schedules things are taking a little longer to get through so.
Now the deals that are teed up for the second half of the year starts. Those are those are all tracking solidly and I don't see anything at this point that would.
Create any further delays in those.
Okay. That's all I had thanks.
Thank you need to go with next question from Alan Peterson.
Green Street.
Hey, everyone. Thanks for the time.
John can you remind us the magnitude of the year over year reduction in onsite head count that's helping keep overall payroll costs only growing at 1% year to date are you guys anticipating any additional reductions over the next year.
Yes, Sean.
So the numbers that I quoted is on and we parse it between office maintenance, but on the office side of the house in the second quarter of the head count was down about 6% on the maintenance side. Its about 4% and then yeah. As you look forward Ben touched on it in his prepared remarks in terms of the benefits that we expect for the <unk>.
<unk> initiatives that we have ongoing and the digital initiatives in particular that bucket of activity that he referenced.
Will result in additional efficiencies at the site level, both on the office and the maintenance side over the last couple of years.
Perfect I appreciate that and just one more on development philosophy question and.
And then you touched on the low end of the range for development Economics will continue to pencil being roughly 100 to 150 basis points wherever scenario, where that spread is tighter than 100 basis points, where you would still start a new construction project.
It is possible, yes, I mean, that's a general range. So it is very dependent on our view on specific markets.
Will become our approach would come from a position of are we creating the appropriate long term value creation relative to the risk right. So when you start to get down around that range.
Going to be asking yourself, those tougher questions and make sure you that you have a higher level of conviction around the value proposition.
Got you I appreciate it guys.
We take over next question from Adam Kramer with Morgan Stanley .
Hey, guys. Thanks, Thanks for taking the question.
Because I kind of want to ask maybe a bit of a bigger picture question about kind of rent growth.
Historically, right Youre kind of pre Covid and long term I think kind of 3% and correct me if I'm wrong, I think kind of 3% rent growth typically per year, it's kind of a decent proxy to use.
Obviously, you're right. We are in this high inflationary environment that even if the year over year numbers, which kind of should cool off here, we're still kind of going to be an elevated level of inflation basis kind of relative to historical so kind of wondering what you guys think we're going to be a good kind of rent growth proxy to use you know it was just 3% still the right number or should that be higher or are they kind of where do you think that.
I believe we kind of think about you know longer term rent growth.
Yeah. Adam This is Sean I'm happy to start and anybody else can chime in but I think the.
The number that you're quoting I mean, it is really a function of just underlying inflation in the economy.
Over a long period of time, though if you look at it.
<unk> in our markets with our customer segments have grown faster than inflation.
I think the number I recommend I recall is around 70 to 100 basis points or so.
Plus or minus above kind of headline inflation again over 40 years kind of timeframe. There are times, where those you know those spreads compress and there were times when they widened so I think.
It really is a function of how you want to think about the underlying inflation rate and therefore, what you might expect in terms of rental rate growth on a nominal basis.
Across our markets again, serving our segment so.
I think how you'd need to think about it as opposed to an absolute number terms.
That's really helpful. Appreciate the color there maybe just a quick follow up on just kind of a guide and what it assumes for maybe second half blended lease growth or second half new lease rate growth, but also kind of where you think and I know, it's tough to predict that far out, but where are you kind of think new lease rate grew.
With a blended growth may be kind of in the year at right. So you kind of have the number that the second half is based on but maybe you know.
Lower number different number where we made in the year just kind of thinking about kind of growth next year right and you can kind of back to those earlier questions.
Yeah, Adam good good question essentially what's built into our re forecast for the second half of the year.
Is some deceleration in like term effective rent change primarily as a result of the comps from the second half of 2021.
I think as I referenced earlier.
If you look at what happened in 2021, we still had negative rent change for the second quarter and then it quickly flipped almost up 8% in the third quarter. So the comps get tougher as you look into the second half. So our expectation is youll see a deceleration on average of roughly 150 basis.
<unk> from the first half effective rent change to the second half.
That's sort of at a high level, how I think about it.
Where it's going to trend as we move through the balance of the second half of the year.
Thanks, so much for the time guys.
Thank you.
Q.
The next question is from Rich Anderson with <unk>.
In BC.
Thanks, just following up on that last question.
What about the like term.
Sort of cadence for the second half is optics, meaning this year you have this tough comp scenario that we don't normally have.
On an absolute dollars.
Our rents.
In November <unk>.
Flea lower than rents are today or are they is the pace of market rent growth just decelerating, but your actual rents are still above where they are today in your forecast.
Yes. It's good question. So today I've mentioned, we've seen a nice run up in asking rents more than 9% since the beginning of the year.
So the question you're really asking is maybe around seasonality in terms of what's likely to happen.
We do expect some seasonality in the back half of the year, we haven't seen it yet.
But in terms of the second half we forecast what we have assumed is that the normal seasonal decline that we would see in the absolute level of rents would be about half in 2022 as compared to sort of pre COVID-19 periods.
So if you remember last year, we didn't really see that rents rose and then they sort of just flat line for the last four or five months of the year.
For this year, we've assumed that they actually will decline just a more modest pace than pre COVID-19 periods with typically dictate.
That assumption, we'll see if that's the case, but that's the assumption we have made so far for this year.
Okay and second question.
Back to the tech.
You know kind of headlines what's what's better for you in terms of the multifamily business tech hiring and during during the pandemic with no commitment to being anywhere near the office. So that's I guess a nice.
Feeling, but I don't know how it affects multifamily since they can live in Nebraska, if they wanted to or tech layoffs or at least at least hiring slowdowns, but now, giving some leverage to employers to say, okay. Well. If you want to essentially keep your job you got to come back to the office at least some some portion of the week.
Is the ladder a better scenario for you or is it just pure hiring accelerating hiring a better scenario for the for the market overall.
Yes, that's a multi variable question rich.
And given we don't typically go through a pandemic.
I'm not sure I can give you a 100% certainty on that certainly we have been through take layoffs cycles.
The tech wreck and such in the past, which were painful as you know.
In terms of showing the I guess the question is lay off sort of moves employer negotiating leverage back to the employer and so more people in the office and then more people having to be near the office and so more people using multifamily.
The essence of the question.
Yeah, No I agree with you on that.
We're always going to have to is obviously, even if there is just say the employment base declines by some modest amount or whatever the number is through the <unk>.
All of that employment is still concentrated within our markets, whereas there are urban submarkets or are suburban job center markets.
It is highly relevant to the demand for our portfolio and just to give you. An example, we have seen some meaningful <unk>.
Reversion to any up migration.
If you look at our move ins even in the.
The second quarter for the same store bucket historically in the second quarter move ins from greater than a 150 miles away is around 10% to 11% of the move in activity.
It was almost 30% in the second quarter. So it's up 250% from normal levels and certainly job centers suburban which is very favorable for us and urban which is less favorable as its only a third of the portfolio, but it's still relevant.
We're seeing that trend come back as opposed to Orient the pandemic, where it was.
There was a lot of out migration so various other markets. So that's a trend that has been in place for a couple of quarters and certainly accelerated very meaningfully in the second quarter and hopefully that trend will continue in the third quarter as employers to start pulling more people back into the office.
In those in those markets to benefit us.
Yeah, Okay. Thank you very much.
Thank you once again, ladies and gentlemen, as a reminder, if you would like to ask a question. Please seek now by pressing star one on your telephone keypad.
That is star one to ask a question we'll take our next question from Joshua <unk> with Bank of America.
Hey, guys hope everyone's well.
I saw on slide eight you had details about the level.
Of your loss to lease and how it was growing from April may and into June .
I'm curious is that the normal dynamic that you see.
At that time of year, and just kind of thinking about.
I'm just trying to think about like.
How extraordinary that.
15% is these days.
Yes, Jeff this is Sean in absolute terms, 15% as to use your word extraordinary.
Way above average to the first question around this is normally trend up during the second quarter. The answer is yes, just not normally at that kind of pace.
So.
So even though.
So even the pace of the growth.
Is a lot higher than you would normally see as like a normal seasonality.
That is correct and what I would point you to as I mentioned rents being up more than 9% since the beginning of the year normally that slope when you look at it.
From January to call. It mid July five type range.
Weaker than that in an average year, it's still trends up just you wouldn't see that same change.
Okay.
Sorry, just one follow up is that just because.
Is the growth in the loss that we use really a function of just how fast friends have moved or is it also because there was like restrictions earlier in the year on being able to push some some right.
It's really the combination of the two so we're able to push rents hard and on renewals, we can't capture all of it. So for people that are just a catheter, 10% rent increase in rents or more than that that spread will accrue at a loss to lease of course.
Alright, I appreciate that thank you.
Sure.
Your next question comes from Kannan, Michelle we'd point within that.
Alright, Thanks for taking my question I have two questions.
Just thinking about the.
General.
Acquisition market.
Has the pullback of Levered buyers also extended to merchant developers and has this give you guys some additional opportunity for acquisitions.
Hey, Conor it's Matt.
I would say typically the merchant builders the buyer of those assets since they're brand new class a assets is usually not a highly levered buyer.
So theres probably been less of a pullback there than there has been in the value add space, but there has been some pullback there and particularly there's some folks that want to sell early before maybe the lease up is fully complete.
So I think it does create an opportunity for us and we do feel like that we are better positioned as a buyer going forward with less competition and where.
Salary, it's less about getting the absolute highest price as it is about certainty of execution in this environment and thats something we offer so.
I do think that it's going to lead to a more favorable buying opportunities for us.
Okay, Great and then my second question is you guys have talked about.
Capital allocation of acquisitions and development a couple of times.
Also I'm just wondering how you guys think about your structured investment program and if you might ramp that up if you're hesitant on developments or.
If you wanted to speed up development once again, if you would kind of.
Carry the same level of investments within the structure development program.
Congress has been to a certain degree we think about that as a separate business, it's $300 million to $500 million of finite capital and we'll build that book of business up over the next couple of years, we may.
So a little bit harder a little bit less based on based on the environment, but I would expect a pretty consistent approach there to the sell out of that business.
Okay.
That's all for me thank you.
Thank you. It appears there are no further question at this time I would like to turn the call back to Mr. <unk> for any additional or closing comments.
Thank you and thank you again for joining US today, we appreciate your support and engagement and have a wonderful rest of the summer.
And this concludes today's call. Thank you for your participation you may now disconnect.
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